Breaking Down the Financial Reform Ballot Measure

The city is asking private companies whether they're interested in taking over the Miramar Landfill, fulfilling one reform needed before a sales tax increase could take effect.

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Proponents of a November ballot measure argue it represents the greatest opportunity for financial reform in San Diego’s recent history.

The key word, though, is “opportunity.”

The 10 reforms listed in the ballot measure provide the start of major structural changes, not the end. The actual savings depend not only on negotiations before the tax could be increased, but also on the implementation of reforms anticipated but not required by the measure. In the end, it will come down to how hard the city’s elected officials decide to push for many reforms’ execution.

For instance, one reform, soliciting proposals to privatize the city landfill, was finished before City Council approved the ballot measure. By itself, the reform saved no money. But it could if the city follows through and privatizes landfill operations.

The situation is similar for several other reforms. Some depend on the extent of labor negotiations. One depends on IRS approval, others on the potential savings from outsourcing.

Ballot measure proponents have noted that much of the savings can’t be known now. State and federal laws require negotiations before some changes can be implemented. Mayor Jerry Sanders’ office and the Office of the Independent Budget Analyst plan to release savings estimates prior to the November election.

Here is a listing of the reforms, their status and how much money they might save the city. We combined two reforms because they both dealt with employee contributions to the pension system.

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Reform: Reduce retiree health care costs.

This is the big one. The city owes more than $1 billion in health care costs to retirees and current employees once they retire. It has funded only 3 percent of that amount and doesn’t pay enough to keep the liability from increasing each year.

The city ratified labor agreements last year that required it and some employee groups to issue a joint study on retiree health care and then negotiate cost reductions.

The study was supposed to be finished in February, but city officials now expect it to be completed next month. Bargaining with all unions will begin once the study has been issued.

Technically, to “reduce” retiree health care costs could mean cutting by as little as one cent, but the ballot measure’s author said she believed substantial reductions were needed.

Current Status: The city and some labor unions are expected to issue a joint study next month with bargaining to begin afterward.

Savings: Unknown. Depends on bargaining.

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Reform: Establish a voluntary 401(k)-style retirement plan for all city employees subject to IRS approval.

This idea is the most novel. It would create a new 401(k)-style retirement plan and allow all employees to opt into it.

The new plan could benefit the city by cutting costs. It could benefit employees by making their contributions lower and giving them control over their retirement money.

The city cannot implement this plan, however, without IRS approval because it could jeopardize the retirement system’s tax-exempt status. Orange County is creating a similar plan and both the county and union leaders there are lobbying Congress for federal legislation to allow it.

Savings depend on how many employees choose the new plan. An Orange County official estimated it would save $1.4 million annually if 10 percent of its retirement system’s 14,000 members opted into the new plan.

Current Status: Not started.

Savings: Unknown. Depends on the plan’s terms, the number of employees who enter it and IRS approval.

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Reform: Establish a pension plan with reduced benefits for new firefighters.

Every employee group except for city firefighters has a reduced pension plan for its new hires. This reform requires new firefighters to have one that mirrors new police officers’.

New police officers who retire at age 55 receive 3 percent of their highest three years of salary times the years they worked.

All firefighters now can retire at age 50 and receive 3 percent of their highest year of salary times the years they worked.

The second-tier pension plans for new employees haven’t reduced many costs now — because those workers aren’t near retirement — but the plans will save about $20 million annually starting in 20 years.

Current Status: Not started.

Savings: City officials estimate the reduced pension plans already implemented will save $20 million annually in 20 years when new hires begin to retire. A new plan for firefighters would add incrementally to that savings.

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Reform: Eliminate “terminal leave,” the practice of allowing city employees to stay on the payroll rather than being paid a lump sum of accrued vacation before their departure.

After an employee leaves the city, “staying on the payroll” means the employee continues to accrue vacation time and service toward their pensions and the city continues to make pension contributions. This reform would replace terminal leave with a lump sum of the vacation and sick time employees are owed.

The benefit has been eliminated for police officers, blue-collar workers, non-union employees and will be purged for lifeguards per their most recent contract. That means the city’s white-collar workers, firefighters and deputy city attorneys still have it.

It’s unknown how much the city would save by eliminating the benefit for the three remaining unions, but the city has analyzed the savings in other situations. According to city statistics, if 100 average police officers with 700 hours of unused leave took a lump sum upon their departure instead of terminal leave, the city would save $1.7 million.

Current Status: Terminal leave exists for three city unions. It has been eliminated already for the other three unions and non-union employees.

Savings: Unknown. Depends on when it’s implemented and how much leave employees have.

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Reform: Eliminate certain city pension contributions, known as the “pickup” or “offset,” for non-union employees and reduce those payments for union employees.

Both the city and its employees contribute to the city’s pension system. The city can “pick up” or pay a percentage of the employees’ contribution. How much the city picks up increases an employee’s take-home pay by the same amount.

The reform would eliminate pickups for elected officials, their staffs and other non-union employees. It also requires the reduction of pickups for union employees. Most of the city’s six unions already had their pickups eliminated through prior labor negotiations. They still exist only for the city’s white-collar and lifeguard unions.

The city is setting aside $4.8 million in its current day-to-day operating budget to pay pickups. Presumably, if the city eliminated the benefit entirely it would save that amount.

Current Status: Pickups exist for two city unions, non-union employees and elected officials. They already have been eliminated for four unions.

Savings: Approximately $4.8 million in the day-to-day operating budget if all pickups were eliminated.

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Reform: Complete a study determining if the Deferred Retirement Option Plan costs the city money and if it does, hold labor negotiations to eliminate the costs.

The Deferred Retirement Option Plan, or DROP, allows most employees to retire, keep working for five years and collect a monthly pension payment, which is deposited into an account paying a guaranteed return. The money put in the DROP fund can be rolled over into an individual retirement account when the employee retires.

The plan is supposed to save the city money by giving experienced employees an incentive to keep working while not racking up increased service time toward their pensions. But it has come under intense criticism as a “double-dipping” perk. The city retirement system has cut the DROP account’s interest rate by more than half and the city eliminated the plan for all new hires as of mid-2005.

Various examinations of DROP have come to different conclusions. This reform calls for a definitive study showing if the program costs the city money and to begin negotiations to eliminate the extra costs if it does. The city’s municipal code says that the program should not cost anything extra.

Any savings would come if the program was found to cost money and negotiations reduced those costs.

Current Status: A completed study is expected in January.

Savings: Unknown. If the study shows the program costs money, savings would come after negotiations to reduce those costs.

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Reform: Finish negotiations on the broad outsourcing measure known as managed competition, which allows the city to privatize some services if doing so saves enough money.

In 2006, San Diego voters overwhelmingly approved a managed competition ballot measure, one of Mayor Jerry Sanders’ signature financial reforms. It was supposed to give the city the authority to have private businesses compete with city departments and outsource functions if the private sector could do it cheaper.

But no city function has undergone managed competition as labor negotiations have stalled for four years.

The city’s top labor negotiator told the council recently that the city had reached a tentative agreement on managed competition with its white-collar union and was awaiting final approval from the city’s blue-collar union.

The reform lists a series of departments that could then go through the managed competition process, such as trash collection and automobile maintenance, but does not mandate that they do so.

Current Status: Labor negotiations are complete for one of two city unions and the other is close.

Savings: Savings depends on departments targeted and the bids the city receives after negotiations are complete. The reform alone doesn’t guarantee any savings.

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Reform: Request bids for the city’s information technology services.

The city’s information technology budget is more than $62 million and a city-created nonprofit, the San Diego Data Processing Corp., provides more than half of those services.

In April, the city privatized a small portion of IT to a Gardena-based company at an estimated 47 percent savings, or $1 million. Two months later, Sanders announced plans to hire an expert to advise the city on outsourcing the remaining services the Data Processing Corp. now provides.

This reform is complete once the city asks private companies to bid. It doesn’t require the city to outsource.

Current Status: The city is hiring an IT outsourcing advisor.

Savings: Savings depend on the bids the city receives and if the city decides to privatize. The reform alone doesn’t guarantee any savings.

The city’s request says it intends to privatize the landfill. But any decision would need the council’s approval and the reform doesn’t require the landfill’s privatization. An updated schedule says the city would recommend a company to the council in early December.

Savings would depend on the bids the city received.

Current Status: Complete.

Savings: Savings depends on whether the city asks for bids, what those bids are and if privatization occurs. The reform alone doesn’t guarantee any savings.

Clarification:This story has been updated to clarify that the city’s retirement system cut the DROP interest rate, not the city, which eliminated the plan for new hires.